- Published on
Malaysian Banking Law: Definition of Banker, Banking Business and Customer Relationship
Introduction
Banking law governs the legal relationship between banks and their customers. In order to understand banking law properly, it is necessary first to understand the meaning of important concepts such as:
Modern banking has evolved significantly from traditional banking activities. Banks today are no longer confined to merely receiving deposits and granting loans. They now provide numerous financial services including:
Why Banks Are Called Financial Service Providers
Traditionally, banks mainly:
Hence:
Modern banks are commonly referred to as financial service providers because they provide diversified financial and investment services beyond traditional banking functions.
Importance of Defining “Bank” and “Banker”
It is important to determine who qualifies as a banker because:
First:
The banker–customer relationship possesses unique legal characteristics different from ordinary commercial relationships.
Second:
Numerous statutes refer specifically to:
Common Law Definition of a Bank
At common law, there is no single exhaustive definition of “bank” or “banking.”
In Bank of Chettinad Ltd of Colombo v IT Commissioners of Colombo, the Privy Council observed that the meaning of “bank” and “banking” changes over time and differs between countries depending on economic and social conditions.
Similarly, in Bank of New South Wales v Commonwealth, Dixon J explained that banking is impossible to define comprehensively because banking practices evolve from country to country and across different historical periods.
Thus:
The meaning of banking is flexible and evolves according to commercial and social developments.
Banking as Part of Modern Commerce
In Commonwealth of Australia v Bank of New South Wales, the court described banking as involving:
However, in Re Securitibank (in liquidation), certain merchant banking activities alone were held insufficient to constitute banking business because the companies lacked essential banking characteristics.
Essential Characteristics of Banking
Australian Approach
In State Savings Bank of Victoria v Permewan Wright & Co Ltd, the court described banks as financial reservoirs receiving deposits and re-lending money.
Isaac J stated that the essential characteristics of banking are:
English Approach
In United Dominions Trust Ltd v Kirkwood, the Court of Appeal identified three traditional characteristics of banking:
Lord Denning MR further explained that banking is easier to recognise than precisely define. Reputation, commercial standing, stability, and probity are also relevant considerations.
Modern Position on Banking Business
Modern banking practices have reduced the importance of traditional cheque-based activities because electronic banking and digital transfers now dominate financial transactions.
Consequently:
Modern banking law increasingly focuses on the substance of financial intermediation rather than traditional cheque functions alone.
Textual and Academic Definitions of Banker
Paget’s Law of Banking
Paget explains that a banker ordinarily:
Halsbury’s Laws of England
Halsbury defines a banker as:
An individual, partnership, or corporation whose predominant business consists of receiving money on deposit or current account and dealing with cheque payments and collections.
Dr HL Hart’s Definition
Dr HL Hart defines a banker as:
A person or company receiving money and collecting instruments for customers while undertaking to honour cheques drawn against available balances.
These definitions are excellent descriptions of traditional deposit banking, although modern banking now extends far beyond those functions.
Statutory Definitions in Malaysia
Under the repealed Banking and Financial Institutions Act 1989 (“BAFIA”), banking business included:
Under section 2(1) FSA 2013:
Authorised Person vs Approved Person
Under FSA 2013:
Licensed / Authorised Person
A person licensed under section 10 to conduct:
A person approved under section 11 to conduct specific regulated businesses such as:
Licensed persons conduct core banking or insurance businesses, whereas approved persons conduct specialised regulated financial activities.
Judicial Interpretation of Banking Business
Malaysian and English courts have debated whether all traditional banking functions must exist before an institution qualifies as carrying on banking business.
Some earlier English authorities insisted that:
However, other courts recognised that institutions may still conduct banking business without operating full current account services.
This tension reflects the evolution of banking practices.
Modern Malaysian Position on Banking Business
Malaysian courts generally interpret the statutory definition conjunctively.
In Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd, the court held that:
Providing financing alone does not automatically amount to carrying on banking business requiring a banking licence.
Development Finance Institutions Are Not Necessarily Banks
In Sabah Development Bank Bhd v SKBS (Sabah) Sdn Bhd, the court held that development finance institutions are specialised financial institutions rather than banks.
The court explained that:
Can Non-Banks Give Loans?
Yes.
Numerous cases confirm that:
Providing loans or financing alone does not necessarily amount to carrying on banking business.
Examples include:
✔ finance companies;
✔ development finance institutions;
✔ investment firms
may provide financing without necessarily being licensed banks.
Meaning of Customer
Unlike “banker,” Malaysian statutes generally do not define “customer.”
The FSA 2013 defines “depositor” but not “customer.”
In the United States, the Uniform Commercial Code defines customer broadly to include:
Judicial Principles on Customer Relationship
Courts developed various principles determining when banker–customer relationships arise.
Intention to Create Relationship
In Robinson v Midland Bank Ltd, the court held:
Banker–customer relationships arise only where both parties intend to create such relationships.
Account Relationship
In Great Western Railway Co v London and County Banking Co Ltd, Lord Davey stated:
Some form of account relationship is generally necessary before customer status arises.
Duration Not Essential
Earlier courts believed customer relationships required duration.
However, in Commissioners of Taxation v English Scottish and Australian Bank Ltd, the House of Lords held:
Duration is not essential.
A customer relationship may arise immediately upon the first deposit or collection transaction.
Immediate Customer Status
In Ladbroke & Co v Todd, the court held:
A person may become a customer even before drawing any funds.
Similarly, in Oriental Bank of Malaya v Rubber Industry (Replanting Board), a fraudster who opened an account using forged documents was still considered a customer because the bank accepted the account relationship.
Walk-In Customers and Casual Services
Courts distinguish between:
However, in Kehar Singh all Jasa Singh v Standard Chartered Bank, a walk-in customer purchasing a bank draft was still owed a duty of care because a banking transaction existed.
Thus:
Formal account ownership is not always necessary before banking duties arise.
Banks as Customers
In Importers Co Ltd v Westminster Bank Ltd, one bank collecting cheques for another bank was held to be acting for a customer.
Thus:
A bank itself may become a customer of another bank.
Rights and Obligations in Banker–Customer Relationships
Once the banker–customer relationship exists:
Loan Restructuring and Banking Rights
In Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd, the court held:
A bank may lawfully withhold further drawdowns where the borrower breaches repayment or restructuring obligations.
The case established that:
Overall Definition of Banker
Based on common law, statutory law, academic writings, and judicial decisions:
A banker is a person, corporation, or licensed financial institution whose primary business involves receiving deposits or funds from the public, managing customer accounts, facilitating payment and collection transactions, providing financing or credit facilities, and conducting financial intermediation services under legal and regulatory supervision.
Modern banking law recognises that banking extends beyond traditional cheque-based functions and now encompasses broader financial service activities.
Introduction
Banking law governs the legal relationship between banks and their customers. In order to understand banking law properly, it is necessary first to understand the meaning of important concepts such as:
- bank;
- banker;
- banking business; and
- customer.
Modern banking has evolved significantly from traditional banking activities. Banks today are no longer confined to merely receiving deposits and granting loans. They now provide numerous financial services including:
- credit and charge cards;
- digital banking;
- electronic fund transfers;
- trade financing;
- investments;
- insurance services;
- custodial services;
- mobile payment systems; and
- investment banking services.
Why Banks Are Called Financial Service Providers
Traditionally, banks mainly:
- accepted deposits;
- honoured cheques; and
- granted loans.
- foreign exchange transactions;
- investment products;
- securities trading;
- electronic payment systems;
- internet banking;
- trade finance;
- wealth management;
- insurance products;
- financing facilities;
- trustee services.
Hence:
Modern banks are commonly referred to as financial service providers because they provide diversified financial and investment services beyond traditional banking functions.
Importance of Defining “Bank” and “Banker”
It is important to determine who qualifies as a banker because:
First:
The banker–customer relationship possesses unique legal characteristics different from ordinary commercial relationships.
Second:
Numerous statutes refer specifically to:
- banks;
- bankers; or
- banking business.
Common Law Definition of a Bank
At common law, there is no single exhaustive definition of “bank” or “banking.”
In Bank of Chettinad Ltd of Colombo v IT Commissioners of Colombo, the Privy Council observed that the meaning of “bank” and “banking” changes over time and differs between countries depending on economic and social conditions.
Similarly, in Bank of New South Wales v Commonwealth, Dixon J explained that banking is impossible to define comprehensively because banking practices evolve from country to country and across different historical periods.
Thus:
The meaning of banking is flexible and evolves according to commercial and social developments.
Banking as Part of Modern Commerce
In Commonwealth of Australia v Bank of New South Wales, the court described banking as involving:
- creation and transfer of credit;
- lending activities;
- investment transactions;
- related financial operations.
However, in Re Securitibank (in liquidation), certain merchant banking activities alone were held insufficient to constitute banking business because the companies lacked essential banking characteristics.
Essential Characteristics of Banking
Australian Approach
In State Savings Bank of Victoria v Permewan Wright & Co Ltd, the court described banks as financial reservoirs receiving deposits and re-lending money.
Isaac J stated that the essential characteristics of banking are:
- receiving deposits repayable upon agreed terms;
- utilising deposited money through lending.
- cheques;
- current accounts;
- letters of credit;
- telegraphic transfers;
- secured loans
English Approach
In United Dominions Trust Ltd v Kirkwood, the Court of Appeal identified three traditional characteristics of banking:
- Conducting current accounts;
- Paying cheques drawn on the bank;
- Collecting cheques for customers.
Lord Denning MR further explained that banking is easier to recognise than precisely define. Reputation, commercial standing, stability, and probity are also relevant considerations.
Modern Position on Banking Business
Modern banking practices have reduced the importance of traditional cheque-based activities because electronic banking and digital transfers now dominate financial transactions.
Consequently:
Modern banking law increasingly focuses on the substance of financial intermediation rather than traditional cheque functions alone.
Textual and Academic Definitions of Banker
Paget’s Law of Banking
Paget explains that a banker ordinarily:
- accepts current accounts;
- honours cheques;
- collects cheques for customers.
Halsbury’s Laws of England
Halsbury defines a banker as:
An individual, partnership, or corporation whose predominant business consists of receiving money on deposit or current account and dealing with cheque payments and collections.
Dr HL Hart’s Definition
Dr HL Hart defines a banker as:
A person or company receiving money and collecting instruments for customers while undertaking to honour cheques drawn against available balances.
These definitions are excellent descriptions of traditional deposit banking, although modern banking now extends far beyond those functions.
Statutory Definitions in Malaysia
Under the repealed Banking and Financial Institutions Act 1989 (“BAFIA”), banking business included:
- accepting deposits;
- paying and collecting cheques;
- providing finance.
Under section 2(1) FSA 2013:
- a “licensed bank” means a person licensed under section 10 to carry on banking business;
- “banking business” includes:
- accepting deposits;
- paying and collecting cheques;
- provision of finance.
- licensed businesses; and
- approved businesses.
Authorised Person vs Approved Person
Under FSA 2013:
Licensed / Authorised Person
A person licensed under section 10 to conduct:
- banking business;
- insurance business;
- investment banking business.
A person approved under section 11 to conduct specific regulated businesses such as:
- payment systems;
- money broking;
- financial advisory;
- insurance broking.
Licensed persons conduct core banking or insurance businesses, whereas approved persons conduct specialised regulated financial activities.
Judicial Interpretation of Banking Business
Malaysian and English courts have debated whether all traditional banking functions must exist before an institution qualifies as carrying on banking business.
Some earlier English authorities insisted that:
- current accounts;
- cheque payments;
- cheque collection
However, other courts recognised that institutions may still conduct banking business without operating full current account services.
This tension reflects the evolution of banking practices.
Modern Malaysian Position on Banking Business
Malaysian courts generally interpret the statutory definition conjunctively.
In Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd, the court held that:
- merely providing financing alone does not constitute banking business;
- all statutory elements should generally be read together.
Providing financing alone does not automatically amount to carrying on banking business requiring a banking licence.
Development Finance Institutions Are Not Necessarily Banks
In Sabah Development Bank Bhd v SKBS (Sabah) Sdn Bhd, the court held that development finance institutions are specialised financial institutions rather than banks.
The court explained that:
- using the word “bank” does not automatically make an institution a bank;
- institutions must actually perform essential banking functions.
- development financing;
- trade financing;
- long-term capital financing.
- current accounts;
- cheque payment systems;
- cheque collection services.
Can Non-Banks Give Loans?
Yes.
Numerous cases confirm that:
Providing loans or financing alone does not necessarily amount to carrying on banking business.
Examples include:
- Vernes Asia Ltd v Trendale Investment Pte Ltd;
- Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd;
- Koh Kim Chai v Asia Commercial Banking Corporation Ltd.
✔ finance companies;
✔ development finance institutions;
✔ investment firms
may provide financing without necessarily being licensed banks.
Meaning of Customer
Unlike “banker,” Malaysian statutes generally do not define “customer.”
The FSA 2013 defines “depositor” but not “customer.”
In the United States, the Uniform Commercial Code defines customer broadly to include:
- account holders;
- persons for whom banks collect items.
Judicial Principles on Customer Relationship
Courts developed various principles determining when banker–customer relationships arise.
Intention to Create Relationship
In Robinson v Midland Bank Ltd, the court held:
Banker–customer relationships arise only where both parties intend to create such relationships.
Account Relationship
In Great Western Railway Co v London and County Banking Co Ltd, Lord Davey stated:
Some form of account relationship is generally necessary before customer status arises.
Duration Not Essential
Earlier courts believed customer relationships required duration.
However, in Commissioners of Taxation v English Scottish and Australian Bank Ltd, the House of Lords held:
Duration is not essential.
A customer relationship may arise immediately upon the first deposit or collection transaction.
Immediate Customer Status
In Ladbroke & Co v Todd, the court held:
A person may become a customer even before drawing any funds.
Similarly, in Oriental Bank of Malaya v Rubber Industry (Replanting Board), a fraudster who opened an account using forged documents was still considered a customer because the bank accepted the account relationship.
Walk-In Customers and Casual Services
Courts distinguish between:
- casual services; and
- actual banking relationships.
However, in Kehar Singh all Jasa Singh v Standard Chartered Bank, a walk-in customer purchasing a bank draft was still owed a duty of care because a banking transaction existed.
Thus:
Formal account ownership is not always necessary before banking duties arise.
Banks as Customers
In Importers Co Ltd v Westminster Bank Ltd, one bank collecting cheques for another bank was held to be acting for a customer.
Thus:
A bank itself may become a customer of another bank.
Rights and Obligations in Banker–Customer Relationships
Once the banker–customer relationship exists:
- both parties owe legal obligations.
- honouring valid mandates;
- exercising reasonable care;
- maintaining confidentiality.
- repayment;
- compliance with financing conditions;
- payment of interest.
Loan Restructuring and Banking Rights
In Bekalan Sains P & C Sdn Bhd v Bank Bumiputra Malaysia Bhd, the court held:
A bank may lawfully withhold further drawdowns where the borrower breaches repayment or restructuring obligations.
The case established that:
- restructuring arrangements are conditional;
- conditions precedent must be fulfilled;
- banks may protect themselves against defaulting borrowers.
Overall Definition of Banker
Based on common law, statutory law, academic writings, and judicial decisions:
A banker is a person, corporation, or licensed financial institution whose primary business involves receiving deposits or funds from the public, managing customer accounts, facilitating payment and collection transactions, providing financing or credit facilities, and conducting financial intermediation services under legal and regulatory supervision.
Modern banking law recognises that banking extends beyond traditional cheque-based functions and now encompasses broader financial service activities.
0 Comments